The UK’s pioneering Making Tax Digital (MTD) initiative is mandating accountants and businesses to embrace digital record-keeping and cloud technology to administer a fully digital tax landscape. It requires businesses to submit their tax filings through MTD compatible software which prepares returns and submits them to HMRC digitally. These changes are a radical overhaul of an archaic system with origins dating back over 200 years, and make the UK economy fit for the twenty-first century.
A successful start
The first phase of MTD’s implementation consisted of MTD for VAT which was introduced in 2019 for VAT registered businesses with a taxable turnover above the threshold (£85,000). From April 2022, all VAT registered businesses have to comply.
In March 2020, HMRC reported that over 1.4 million businesses had signed up for MTD, with four million VAT returns submitted through the service. This move towards a digital tax system is forcing businesses to move their accounting data to the cloud to comply with these new regulations. While bridging software, connecting VAT records on spreadsheets to HMRC’s portal is a workaround from having to use cloud accounting software with HMRC capabilities, this can create more work for accountants as well as resulting in businesses not benefiting from real-time cloud data.
Signing up to MTD compatible cloud accounting software such as Xero allows accountants and their clients to benefit from powerful automation features related to bookkeeping, reconciliations, repeating journals and bank feeds.
This saves accountants time and money, with freed up resources being used to improve client relationships, optimise workflows, and provide opportunities to introduce new revenue streams.
Over the next five years, most of the UK’s taxation system will be digitised. Future additions to the MTD roadmap include income tax (for self employed businesses and landlords with property income above £10,000) from April 2023 and corporation tax, which HMRC have confirmed will not be mandated before 2026. Switching to MTD compatible software now will minimise disruption to accountants and their clients by providing them with adequate time to prepare for changes before they are mandated.
Embracing digital tax
Xero recognises how integral MTD is in transforming the administration of accounting and financial data. The development of Xero Tax is in part inspired by HMRC embracing a digital tax system. Similarly, Xero Tax is revolutionising accounts production and tax filings, making accountants’ lives easier by connecting directly to Companies House and HMRC, alongside allowing them to benefit from their digital record-keeping by automating data transfer from one system to another.
Xero is building digital tax infrastructure both for today and tomorrow. Corporation tax and company accounts production are live now, and personal tax is set to launch in the summer, with the company committed to building MTD solutions for both types of taxes in the future which will be ready in time for the mandated deadlines.
If you’re an accountant or bookkeeper in practice, sign up to the Xero partner programme and access Xero Tax. You’ll get the tools, resources and dedicated account management to help get your practice and clients set up for success.